August 9, 2018

NO ONE SAID DEMOCRACY WAS A CAKEWALK:

Putin's Pension Headache: For the Russian President and his team, social security reform is no walk in the park. (Aaron Schwartzbaum, 8/09/18, American Interest)

There are currently 46.5 million pensioners in Russia, roughly a third of the country's population. Annual expenditures on pensions this year are set to total 7.35 billion rubles ($120 billion) compared to 16.5 trillion in budget spending. Suffice it to say, this is a large and expensive system. The key problem is a demographic one: Russia's working-age population, the tax base for the pension system, is decreasing as a proportion of the overall population. In 2010 working-age Russians made up 62 percent of the population. This year the figure is only 58 percent, and that number will only shrink over the next decade. This is not a case of Russia the "dying bear," as a familiar trope goes; the trend is occurring across Europe as a whole. But it nonetheless poses a particular problem for Putin.

When the Pension Fund of Russia (PFR) operates at a deficit, as it has in recent years, the federal government must transfer funds out of the budget to close the gap. That reduces the fiscal space available for key items such as Putin's bold spending plans for his current term. It is also a political legitimacy problem: Part of the social contract in Putin's Russia, at the very least until the economic crisis, was the exchange of political freedoms for prosperity.

There are two components of the pension reform, one of which has received significantly more news play than the other. First is a gradual hike in the retirement age: from 60 to 65 for men and from 55 to 63 for women. It bears note that the current retirement age was stipulated in 1932 and by modern standards is very generous, despite the actual pension benefits being fairly meagre.

Second is a change to the mandatory savings component of Russia's pension system--roughly equivalent to a 401(k). Under the most recent edits to Russia's pension code, workers could elect to divert up to 6 percent of the 22 percent payroll tax they face into individual savings accounts, the sort of "nest egg" concept that has been floated in the United States on occasion. The issue with this system was that these accounts were technically property of the state, and contributions to them were "frozen" starting in 2013: The government used these contributions to cover present pension needs instead. Under the new system, with a roadmap expected in the coming weeks, workers will contribute the whole 22 percent payroll tax to present pension needs and be able to save an additional 6 percent--likely on an opt-out basis, to the alarm of some. It is an unofficial mantra for local economy officials that if a policy can't be made to work on a market basis, rigid laws often do the trick.

A slew of public polling since pension reform was announced--particularly following the closing of the World Cup--shows warning signs for the Kremlin. According to the independent Levada Center, approval of the Duma sits at 33 percent, approval of the government sits at 37 percent, and approval of Prime Minister Medvedev is at 31 percent. Putin's approval rating is at 67 percent, low by his standards. Measures of protest potential--a gauge of how liable Russians are to take to the street--should worry the Kremlin as well. Pollster VTsIOM's protest index is presently at 43, the highest it has been since 2005 (more on that year shortly). Its accompanying measure of personal protest potential recently reached 36, a high since the mass protests that rocked Russia in 2011 and 2012. Another measure by Levada finds 41 percent of Russians believe protests over economic issues are "entirely possible" while 28 percent would personally take part: the highest level these figures have reached since Russia defaulted on its debt in 1998. It can be said that the current reform project has firmly put to rest the Crimean consensus, the massive boost in popularity enjoyed by officials after the annexation of Crimea. We're back to 2013.